U.S. Leaders Plan to Grapple A Hot Potato: Social Security

By RICHARD W. STEVENSON

Published: January 8, 1998

WASHINGTON, Jan. 7—
To one camp, Social Security is an inviolable promise to provide all workers the foundation of a comfortable retirement, and the program's looming financial problems should not be an excuse to dismantle what is in many ways the Federal Government's premier antipoverty program.

From another perspective, Social Security's obligations to future retirees so greatly exceed its projected receipts that the system cannot and should not be maintained as a mammoth Government entitlement. It should instead be remade to push more responsibility -- and risk -- into the hands of individuals.

Somewhere within that ideological gulf, the Clinton Administration, the Republican leadership and Congressional Democrats say they have begun looking for a politically and economically feasible way of assuring that the Social Security system does not become insolvent in the decades after the huge baby-boom generation begins retiring around 2010.

The White House and Speaker Newt Gingrich both said this week that they wanted to begin tackling the issue, one of the most politically explosive on Washington's agenda, and wanted to reach a final deal sometime between the mid-term Congressional elections in November and the start of the 2000 Presidential race a year or so later.

Because the problems in Social Security have been apparent for years, there is no shortage of proposed solutions bouncing around Washington. But while many politicians, economists and public policy experts say there is room for a compromise, there is little consensus on which of the competing and often painful proposals should be adopted.

''Substantively, the ground has been plowed,'' said Senator Judd Gregg, the New Hampshire Republican who is chairman of the Budget Committee's task force on Social Security. ''The question of whether anything is going to grow is one of political leadership.''

Also unresolved is just what process President Clinton, Republican leaders and Democrats in Congress will use to hash out their differences and avoid turning Social Security into a bitterly partisan issue subject to demagoguery by both sides.

And all sides are still trying to gauge public opinion, both among retirees receiving Social Security benefits now and later generations who face the prospect of making bigger contributions to finance their parents' retirements while receiving little when they reach old age.

''We have to try to raise the sense of national urgency,'' said Gene Sperling, the White House's economic policy adviser.

The revenue raised for Social Security by payroll taxes on workers and employers currently exceeds what the system pays out in benefits, allowing the Government to accumulate a surplus. But after the baby boomers start to retire in droves around 2010, benefit payments will begin to exceed revenue, and under current projections the program will run through the surplus by 2029. After that, revenue each year would be sufficient to pay no more than about 75 percent of promised benefits.

Those who favor maintaining the Social Security system more or less in its present form include many Democrats, unions and the big groups representing the elderly. They advocate relying on financial changes to increase revenue or limiting benefits to avoid big changes in the system's structure or obligation to make guaranteed payments based on lifetime earnings. Most White House officials lean toward keeping a system that guarantees a defined amount of money to retirees.

''We need to also encourage private savings, but that should not come at the expense of the Social Security system that provides a base, a floor of support for millions and millions of Americans,'' Franklin D. Raines, the White House budget director, said on Sunday on the NBC News program ''Meet the Press.''

To keep the current system intact would require choosing among options including a reduction in benefits, an increase in taxes and an acceleration in the already scheduled increase in the retirement age.

There is also support for trying to increase the amount of money the Government makes investing the pool of funds it holds to pay future benefits. That trust fund is now invested entirely in Government bonds, which have generated only a fraction of the returns from stocks in recent years. Many analysts say the Government should invest part of the money in stocks.

The other general approach, favored by many conservative Republicans, calls for reducing the level of payment guaranteed by the Government but putting more of the taxes paid back into the hands of individuals to invest.

The most modest of these proposals would allow individuals to allocate some fraction of the money they contribute to Social Security to particular investment vehicles. The most radical approaches call for largely replacing the system with mandatory retirement savings accounts.

After two years of work, a Federal advisory panel reported last year that it was deeply split about which approach to take. Six of 13 members supported bolstering the current system, in part by allowing the Government to invest part of the Social Security trust fund in the stock market. Five favored creating mandatory savings accounts managed by individuals, reducing the current program to a minimum safety net of assured payments.

Two of the panel's members, however, advocated a middle-ground approach that many analysts think could point the way to a compromise: retain the current system but offset a decline in benefits with a mandatory savings account that would be financed by an increase in the payroll tax.

Many of the proposals circulating on Capitol Hill seek to strike a similar balance between fixing the current system and taking a more market-oriented approach.

But powerful groups representing the elderly are wary of substantial changes. ''We feel that retirement should be built on the foundation of a defined benefit plan you can count on,'' said John Rother of the American Association of Retired Persons.

There are some measures that could prove politically palatable. Nearly four million employees of state and local governments are not covered by Social Security, and bringing them into the system would generate more revenue.

Many analysts think there will be no way to avoid unpopular steps. The retirement age for full benefit eligibility is already set to rise gradually to 67 from 65 between 2003 and 2029, and some Congress members believe it will be necessary to speed that timetable considerably.

The tax levied to finance Social Security might have to be increased. Currently, a 6.2 percent payroll tax, matched by the employer, is paid on wages up to a cap of $68,400. One option sure to be considered is substantially raising or eliminating the cap, placing a higher tax burden on people with higher incomes. Other options include reducing benefits for the wealthy and cutting cost-of-living increases.